Financial Problems Mostly Everyone Runs Into: Part 2
May 31, 2016 / Sara Davis / Personal Finance Mistakes and Bad Habits to Avoid
Personal finance is something few people learn early on and many people are thrown into suddenly when they reach adulthood.
Because of the lack of preparation before entering adulthood, many people wind up making mistakes when they start managing their own finances. An Assets & Opportunities Scorecard found that 55.6 percent of Americans have subprime credit scores. These scores prevent them from qualifying for loans at prime rates. Instead, when they need a loan, the only rates they are able to obtain are high ones they may not be able to afford.
Many of today's adults did not receive any sort of financial education prior to gradating high school. Business Insider reported that, 20 years ago, Illinois was the only state with the requirement. Now, 16 other states have joined Illinois in mandating financial education for students.
More states beginning to require that high school students take a personal finance class before they graduate is a step in the right direction. However, if you were one of the many Americans who graduated from high school without taking such a course, you likely learned about some common money mistakes the hard way. Here are some of the big ones many people discover on their own:
1. Not understanding your credit card
This is a serious one that many people fall victim to. Some common blunders Americans make include overspending on cards and missing payments.
Missing payments is a serious mistake because payment history accounts for 35 percent of your credit score. The lower your credit score is, the harder it will be to get a loan for something like a home or car later on when you really need it. It will also make it difficult to get another credit card if you decide you want a new one.
Not paying off a balance in full is another mistake cardholders often make that can have additional consequences. Like any other loan, credit cards come with an interest rate. If you don't pay off your balance in full, interest will be added to your payments. If you continue to only make the minimum payment on your card, your balance will stay and grow until you can completely pay it off.
2. Not budgeting
If you can't afford to pay your card off in full every month, or you find you are overspending on your card, it's likely you haven't set a reasonable budget for yourself.
"A budget is a useful tool that can keep you out of debt."
Creating a budget can be tedious, and sticking to one can be hard at times. But in the end, it's worth the effort, as a balanced budget is a useful tool that can keep you out of debt.
To create a budget, first determine your monthly income. Then, calculate how much you spend each month. Include fixed costs and essential payments, like rent, bills and loan payments. Figure out costs that might fluctuate, like groceries, and payments you make that aren't necessary, like new clothes or going to restaurants.
Determine whether you are overspending on certain things and where you can cut costs. Set rules for yourself about how much you can spend each month in certain categories.
3. Not saving for emergencies
When you create your budget, it's easy to only think in terms of the present. But be sure you're including your future self in your budget, too. Many people leave an emergency fund out of their budget, which can turn into a serious problem when you least expect it.
You can't predict when an emergency will strike or what the nature of the emergency will be. Unexpected circumstances come up out of the blue for many people every day. Maybe it's a health problem, a job loss or car trouble.
In any case, if something unfortunate happens and you don't have a reserve of money to prepare for it, you may find yourself panicked about finances. An emergency situation is stressful enough without worrying about how you're going to get by financially.
Protect yourself against unforeseen incidents by setting aside money to use only in case of emergency. A reserve of between three and six months' salary should be sufficient.
Personal finance can be a tricky thing to learn on your own. Save yourself a lot of trouble later on by making sure you follow these three important lessons.